Identifier
Created
Classification
Origin
07BUENOSAIRES65
2007-01-12 20:37:00
CONFIDENTIAL
Embassy Buenos Aires
Cable title:  

ARGENTINA'S ECONOMIC CRISIS LEGACY: FIRST IN ICSID

Tags:  EINV ECON EFIN AR 
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DE RUEHBU #0065/01 0122037
ZNY CCCCC ZZH
R 122037Z JAN 07
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 6965
INFO RUEHAC/AMEMBASSY ASUNCION 5850
RUEHBR/AMEMBASSY BRASILIA 5694
RUEHLP/AMEMBASSY LA PAZ JAN MONTEVIDEO 6071
RUEHSG/AMEMBASSY SANTIAGO 0068
RUEHRI/AMCONSUL RIO DE JANEIRO 2098
RUEHSO/AMCONSUL SAO PAULO 3094
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFISS/HQ USSOUTHCOM MIAMI FL
C O N F I D E N T I A L BUENOS AIRES 000065 

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DOC FOR 4322/ITA/MAC/OLAC/PEACHER
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E.O. 12958: DECL: 01/12/2017
TAGS: EINV ECON EFIN AR
SUBJECT: ARGENTINA'S ECONOMIC CRISIS LEGACY: FIRST IN ICSID
ARBITRATION CASES


Classified By: Econ Counsleor D.P. Climan. Reasons 1.4 (B,D)

------------------------
Introduction and Summary
------------------------

C O N F I D E N T I A L BUENOS AIRES 000065

SIPDIS

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EB/IFD/OIA FOR WSCHOLZ, MTRACTON
WHA FOR WHA/BSC AND WHA/EPSC
E FOR THOMAS PIERCE
PASS NSC FOR JOSE CARDENAS
PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITALLE
PASS USTR FOR EEISSENSTAT, SCRONIN, MSULLIVAN
TREASURY FOR AFAIBISHENKO, NLEE
DOC FOR 4322/ITA/MAC/OLAC/PEACHER
SOUTHCOM FOR POLAD

E.O. 12958: DECL: 01/12/2017
TAGS: EINV ECON EFIN AR
SUBJECT: ARGENTINA'S ECONOMIC CRISIS LEGACY: FIRST IN ICSID
ARBITRATION CASES


Classified By: Econ Counsleor D.P. Climan. Reasons 1.4 (B,D)

--------------
Introduction and Summary
--------------


1. (SBU) Now, five years after Argentina,s December 2001
economic implosion and the largest sovereign default in world
history, considerable attention remains focused on over $20
billion in outstanding claims by holders of defaulted
Argentine bonds. Less well appreciated is the over $13
billion in outstanding arbitral claims against the GoA by
foreign investors, the value of whose Argentine assets were
dramatically reduced by unilateral emergency measures adopted
by the GoA in the aftermath of the crisis. As a consequence,
Argentina today holds the unfortunate distinction of having
the largest number of outstanding arbitration cases pending
at the World Bank,s International Center for the Settlement
of Investment Disputes (ICSID). Following is the first in a
series of 3 cables that (1) review pending ICSID claims
against Argentina and the financial burden their resolution
threatens to impose on the GoA; (2) detail individual cases
filed by U.S. investors; and (3) evaluate the GoA,s strategy
to minimize its ISCID contingent liabilities while continuing
to attract new foreign direct investment.


2. (C) There are currently 33 pending ICSID cases against the
GoA, fully one third of all outstanding ICSID cases. Thirty
of the 33 cases were filed following the December 2001
collapse of Argentina,s currency board and subsequent
economic crisis. Most of these were filed under the
provisions of the U.S., French and Spanish Bilateral
Investment Treaties (BITs). Outstanding ICSID claims against
Argentina total roughly $13.3 billion, with a large
proportion concentrated in the energy sector. This claim
total represents roughly 6.5% of projected 2006 GDP and

almost twice the projected 2006 primary fiscal surplus.
While contingent liabilities resulting from international
arbitral awards on ICSID claims could add substantially to
government debt in coming years, the suspension of a number
of ICSID cases by plaintifs as a result of negotiations with
the GoA along with ICSID final rulings on a few cases that
awarded judgements smaller than original claims could reduce
this $13.3 billion liability number substantially. In any
case, Argentina,s regrettable ICSID track record will
increase the risk premium existing and new foreign investors
will demand to commit new capital to Argentine ventures. END
SUMMARY

--------------
Arbitral Legacy: Privatizations, BITs
--------------


3. (U) During the 1990s, the administration of then President
Carlos Menem undertook the wholesale privatization of
Argentina,s public utilities and services sector as part of
a series of Washington-consensus-style economic reforms.
Privatized sectors included energy (upstream and downstream
hydrocarbons, electricity generation, transmission and
distribution, natural gas transmission and distribution),
telecommunications (landline and cellular systems),transport
infrastructure (toll roads, ports and airports),water/sewage
services and postal services. With the bulk of these
privatizations financed by foreign direct investment, the GoA
signed a total of 57 bilateral investment treaties (BITs)
which included provisions re-stating Argentine constitutional
and commercial code provisions guaranteeing foreign investors
national treatment, the right to repatriate dividends and the
right to compensation for expropriation. To offer foreign
investors further comfort, most BITs also included provisions
for international arbitration as a dispute settlement



mechanism between private investors and the GoA. Most of
these BIT arbitration provisions cite the World Bank,s
ICSID, while a few cite alternate arbitral forums, most
prominently UNCITRAL (United Nations Commission on
International Trade Law). Argentina signed the ICSID
Convention in May 1991 and it entered into force in 1994
following parliamentary ratification.

--------------
Breakdown of Outstanding ICSID Cases/Claims
--------------


4. (SBU) There are currently 33 pending ICSID cases against
the GoA, roughly one third of all outstanding ICSID cases.
Of these, the bulk were filed under the U.S. BIT (14 cases),
the French BIT (8 cases) and the Spanish BIT (5 cases).
Numerous cases were issued under multiple BITs. Thirty of
the 33 cases were filed following as a result of disputes
resulting from the December 2001 collapse of Argentina,s
currency board and subsequent economic crisis. Of the 33
active ICSID cases, 18 are concentrated in the energy sector
(upstream hydrocarbon development, electricity generation and
distribution and natural gas transportation and distribution)
with known claims for USD 7.1 billion; 2 in
telecommunications with known claims for USD 2.9 USD billion;
6 in waterworks with known claims for USD 2.6 billion.


5. (SBU) Outstanding ICSID claims against Argentina total
roughly $ 13.3 billion, 6.5% of 2006 GDP, almost twice the
estimated 2006 primary fiscal surplus. (Note: This total
excludes an estimated $5.5 billion claim by Task Force
Argentina representing 170,000 Italian holders of defaulted
GoA bonds: It is widely held that bond-holdings do not
qualify as investments protected by the bilateral treaties
overseen by ICSID. End Note). Seven of these 33 ICSID cases
have been officially suspended (but not withdrawn) as a
consequence of negotiations between individual companies and
the GoA; the $ 13.3 billion claim total drops by almost half
to $ 7.9 billion if claims of suspended cases are subtracted.
In addition, the first two final rulings on post-crisis
ICSID cases (septel)have awarded judgements smaller than
original claims. In any case, contingent liabilities
resulting from international arbitral awards on ICSID claims
could add substantially to government debt in the coming
years. (Note: Information about cases filed before ICSID is
not public and ICSID bodies requires only minimal disclosure
of the parties, names and a brief indication of the subject
matter, which makes such disputes difficult to track.
Figures included in this cable are the result of Embassy,s
own analysis and data collection from U.S. company contacts,
the ICSID website, legal journals and the media. ICSID claim
totals do not include claims for 6 of the 33 cases because
they are unknown to Embassy or yet to be determined. Neither
are UNCITRAL claims included in this total. End Note).

--------------
ICSID Case Claimants by Nationality and BIT
--------------


6. (SBU) Firms involved in pending cases against Argentina
before ICSID tribunals come from the US, Chile, Italy,
Germany, France, Spain and the UK. However, the legal
addresses of affiliates and subsidiaries which are the legal
entities filing the suits are not always located in firms,
countries of origin and, as a consequence, the BITs on which
these companies base their ICSID claims do not always
coincide with the investor,s country of origin. (Note:
This has offered some interesting advocacy challenges for
Embassy Buenos Aires on which we have solicited guidance from
the Department of Commerce,s Washington Advocacy Center.
End Note). Outstanding ICSID cases have been based on BITs



negotiated between Argentina and the US (signed 1991, Law
24124),Chile (signed 1991, Law 24342),the Belgo-Luxembourg
Economic Unit (signed 1990, Law 24123),Germany (signed 1991,
Law 24098),France (signed 1991, Law 24100),Spain (signed
1991, Law 24118) and the UK (signed 1990, Law 24184).
Outstanding cases are listed in filing order:
(ARB/Year/sequential case number)

-------------- --
US BIT - 14 cases (claims for USD 2.5 billion)
-------------- -

-- Enron Corporation and Ponderosa Assets, L.P. (Case
ARB/01/3)
-- CMS Gas Transmission Company (Case ARB/01/8)
-- LG&E Energy Corp. and LG&E Capital Corp. (Case ARB/02/1)
-- Sempra Energy International (Case ARB/02/16)
-- AES Corporation (Case ARB/02/17)
-- Continental Casualty Company v. Argentine Republic (Case
ARB/03/9)
-- Pan American Energy LLC and BP Argentina Exploration
Company (Case ARB/03/13)
-- El Paso Energy International Company (Case ARB/03/15)
-- Unisys (Case ARB/03/27)
-- Azurix Corp. (Case ARB/03/30)
-- BP America Production Company and others (Case ARB/04/8)
-- CIT Group Inc. (Case ARB/04/9)
-- Mobil Exploration and Development Inc. Suc. Argentina and
Mobil Argentina S.A. (Case ARB/04/16)
-- Asset Recovery Trust S.A. (Case ARB/05/11)

-------------- --
France BIT - 8 cases (claims for USD 5 billion)
-------------- --

-- Compaa de Aguas del Aconquija S.A. and Vivendi
Universal (Case ARB/97/3)
-- Suez, Sociedad General de Aguas de Barcelona, S.A. and
Interagua Servicios Integrales de Agua, S.A. (Case ARB/03/17)
(also under the Spain BIT)
-- Aguas Cordobesas, S.A., Suez, and Sociedad General de
Aguas de Barcelona, S.A. (Case ARB/03/18) (also under the
Spain BIT)
-- Suez, Sociedad General de Aguas de Barcelona, S.A. and
Vivendi Universal, S.A. (Case ARB/03/19) (also under the
Spain BIT and the UK BIT)
-- Electricidad Argentina S.A. and EDF International S.A.
(Case ARB/03/22)
-- EDF International S.A., SAUR International S.A. and Lon
Participaciones Argentinas -- S.A. (Case ARB/03/23) (also
under the Belgo-Luxembourg BIT)
-- Total S.A. (Case ARB/04/1)
-- SAUR International (Case ARB/04/4)

-------------- ---
Spanish BIT ) 5 cases (claims for USD 3 billion)
-------------- ---

-- Gas Natural SDG, S.A. (Case ARB/03/10)
-- Suez, Sociedad General de Aguas de Barcelona, S.A. and
Interagua Servicios Integrales de Agua, S.A. (Case ARB/03/17)
(also under French BIT)
-- Aguas Cordobesas, S.A., Suez, and Sociedad General de
Aguas de Barcelona, S.A. (Case ARB/03/18) (also under French
BIT)
-- Suez, Sociedad General de Aguas de Barcelona, S.A. and
Vivendi Universal, S.A. (Case ARB/03/19) (also under French
BIT)
-- Telefnica S.A. (Case ARB/03/20)

-------------- ---



Chile BIT ) 3 cases (claims for USD 1.3 billion)
-------------- ---

-- Metalpar S.A. and Buen Aire S.A (Case ARB/03/5)
-- Compaa General de Electricidad S.A. and CGE Argentina
S.A. Case ARB/05/2)
-- Enersis and others (Case ARB/03/21)

--------------
Belgo-Lux BIT - 3 cases (USD 0.8 billion)
--------------

-- Camuzzi International S.A. (Case ARB/03/2)
-- Camuzzi International S.A. (Case ARB/03/7)
-- EDF International S.A., SAUR International S.A. and Leon
Participaciones Argentinas S.A. (Case ARB/03/23) (also under
French BIT)

-------------- --------------
German BIT - 3 cases (claims for USD 550 million)
-------------- --------------

-- Siemens A.G. (Case ARB/02/8)
-- Wintershall Aktiengesellschaft (Case ARB/04/14)
-- DaimlerChrysler Services AG v. Argentine Republic (Case
ARB/05/1)

--------------
UK BIT ) 1 case (claims for USD 1.7 billion)
--------------

-- Suez Sociedad General de Aguas de Barcelona, S.A. and
Vivendi Universal, S.A. (Case ARB/03/19)(also under the Spain
BIT and the France BIT)

--------------
Netherlands BIT ) (1 claim: USD 0.1 billion)
--------------

-- TSA Spectrum de Argentina, S.A. (Case ARB/05/5),


--------------
Pre-Economic Crisis Argentine ICSID Cases
--------------


7. (U) Even before Argentina became a leading defendant in
international arbitration cases as a result of disputes
triggered by the December 2001 economic crisis, the GoA had
been made party to seven ICSID arbitration cases. These
cases primarily involved public utility firms who alleged
violations of concession contract rights by provincial
governments. Four of these seven cases have been concluded.
The seven claimants, in order of ICSID case filing dates
(ARB/Year/sequential case number) are:

-- Compaa de Aguas del Aconquija S.A. and Vivendi Universal
(France, Case ARB/97/3); cancellation of a water/sewage
provision contract in the province of Tucuman; case still
pending;
-- Lanco International Inc. (US, Case ARB/97/6); port
terminals contract in Buenos Aires; proceeding discontinued
in 2001 at the request of claimant;
-- Houston Industries Energy Inc. and others (US, Case
ARB/98/1); electricity distribution services in the province
of Santiago del Estero; award rendered August 24, 2001;
-- Empresa Nacional de Electricidad S.A. (Chile, Case
ARB/99/4); enforcement of a stamp tax by the province of
Neuquen; proceeding discontinued at the request of claimant;
-- Enron Corp. and Ponderosa Assets L.P. (US, Case ARB/01/3);
enforcement of a stamps tax in the provinces of Rio Negro and



Neuquen; case still pending.
-- CMS Gas Transmission Company (US, Case ARB/01/8); GoA,s
suspension of a clause tying natural gas transportation
charges to the US Producer Price Index; ancillary claims
added to filing following the 2001 economic crisis; case
still pending;
-- Azurix Corp. (Enron Group) (US, Case ARB/01/12);
cancellation of a waterworks provision contract in the
province of Buenos Aires; award rendered July, 2006.

--------------
Post-2001 Crisis ICSID Cases
--------------


8. (SBU) The vast majority of ICSID arbitrations triggered
after 2002 were launched by foreign multinationals that had
won public utility concessions during the wave of 1990
Menem-era privatizations in the oil and gas, electricity,
water, transportation and telecommunications sectors. These
companies claimed breach of concession contracts resulting
from the GoA-mandated conversion into domestic currency
(&pesification8) of public utility rates and the subsequent
freezing of such rates. Some claimants also challenged the
official ban on foreign exchange remittances abroad (for the
most part no longer in force),the mandatory conversion of
dollar-denominated bank deposits into Argentine pesos and
restrictions on crude oil exports.


9. (U) Not all foreign investors negatively affected by the
economic turmoil of 2001-2002 and the policy measures that
followed chose to file arbitral actions. One major group was
foreign-owned commercial banks who were severely impacted by
the devaluation, the GoA,s subsequent asymmetric conversion
into pesos of their dollar-denominated assets and liabilities
and the asymmetric indexation of their loan portfolios.
Restraint on the part of commercial banks was largely based
on GoA promises (subsequently met) to implement measures to
compensate their losses. Post-crisis ICSID cases filed for
reasons not directly linked to pesification and linked policy
measures include: 1) Siemens A.G. claim against the GoA,s
cancellation of a contract to implement a personal identity
and immigration centralized databank; 2) Metalpar S.A. and
Buen Aire S.A. claim concerning the production and sale of
public transportation vehicles; 3) Continental Casualty
Company claim concerning the restraints on transfers; and 4)
Unisys Corp. claim concerning a contract to modernize the GoA
judiciary,s information systems.

--------------
Comment
--------------


10. (C) The GoA,s post-crisis pesification of public sector
utility receipts and freezing of tariffs wiped billions off
of U.S. investor balance sheets. Some foreign investors have
since quit Argentina but many others see considerable
opportunity in a market where domestic demand for goods and
services is being driven by a 4-year strong economic
recovery. Many of these investors appear to have filed ICSID
cases primarily to increase their leverage in negotiating new
deals with the GoA. The consequent suspension (but not
withdrawal) of a significant share of ICSID claims, combined
with tribunal awards to date substantially below claimed
amounts, indicate that the GoA,s probable net ICSID
liability is substantially below the $13-plus billion in
total claims.


11. (C) But a smaller than threatened ICSID contingent
liability for the GoA is hardly the point: The single
largest volume of outstanding ICSID cases have been filed
against Argentina based on the GoA,s unilateral and ) in



terms of scale ) unprecedented post-crisis breach of public
service contracts that were backed by a web of bilateral
investment treaties. At a minimum, this regrettable track
record will increase the risk premium existing and new
foreign investors demand to commit new capital to hard assets
and/or long term contracts here. The U.S. investor community
in Argentina has repeatedly emphasized to us that, though
they continue to add incremental capacity to meet burgeoning
demand, they are not/not contemplating substantial new
greenfield investment due to the uncertain investment climate
here. Argentina,s ICSID legacy and the GoA,s ongoing
predilection for sudden changes in the rules of the
regulatory game is costing Argentina its fair share of global
investment capital ) the share it will need to raise
investment rates from the current 21% of GDP to the 25% level
needed to sustain medium term GDP growth in the 5-6% range.
Argentina,s ICSID legacy will remain costly.
WAYNE